NAFTA Talks — Mutually Acceptable Conclusion, A Paramount Importance

According to congressional aides and industry executives who have been briefed recently by the Trump administration - The United States (U.S.) is aiming to reach a deal in principle with Canada and Mexico; to update the $1.2 trillion North American Free Trade Agreement (NAFTA) in the next three weeks. In an effort to get a deal as quickly as possible, the U.S. has established a May 1 deadline. If the deadline is not met, the Trump administration could suspend an exemption it gave Canada and Mexico on new steel and aluminum tariffs.

In July 2017, the Trump administration provided a detailed list of changes that it would like to see to NAFTA. The top priority was a reduction in the United States' trade deficit. The administration also called for the elimination of provisions that allowed Canada and Mexico to appeal duties imposed by the United States and limited the ability of the United States to impose import restrictions on Canada and Mexico. The list also alleged subsidized state-owned enterprises and currency manipulation

NAFTA negotiations are expected to continue in Washington D.C. on Thursday (April 19, 2018), with the hope that an agreement will be reached prior to the campaigning period for the presidential election in Mexico on July 1. But, no announcement is expected from the talks as "significant gaps" will remain, a Canadian government source said on Tuesday.

What's not yet clear is whether any imminent deal would be a full package to be presented to the three national legislatures for ratification, a preliminary announcement or a less-formal fix that would bypass the legislative process.

However, according to automotive industry experts, U.S. trade negotiators have significantly softened their demands to increase regional automotive content under a reworked NAFTA trade pact in an effort to move more quickly towards a deal in the next few weeks.

Under the current agreement, 62.5% of a car's parts must be from the US, Canada, or Mexico in order to be exempt from tariffs. The U.S. initially wanted to increase that quota to 85% for larger auto parts like transmissions and engines. But this has been cut by 10 percentage points, and the U.S. specific percentage demand dropped, industry officials said.

"The U.S. put on the table 75 percent instead of 85 percent for the regional content value of the vehicle and its core components," said Eduardo Solis, head of Mexico’s AMIA automotive industry association.

The 75 percent regional content is for major components such as engines, drivetrains, axles, suspensions and body panels. Aluminum and steel would go into a bucket of other parts and materials requiring 70 percent regional content, while the third bucket of lesser parts would require 65 percent regional content.

Again, there is a prevailing uncertainty based on the academic assumption — If Trump acts on many of the threats that he has made against Mexico, it is not inconceivable that Mexicans would turn to left-wing populist strongman - Andres Manuel Lopez Obrador, as several South American countries have. Obrador has already taken the lead between January to March (2018), ahead of the country’s presidential election, according to a poll published by GEA/ISA on March 21, 2018, At the very least, US-Mexico relations would worsen, with adverse implications for cooperation on border security, counterterrorism, drug-war cooperation, deportations and managing Central American migration

U.S. President Donald Trump, who blames NAFTA for job losses in the American manufacturing sector, regularly threatens to walk away from the pact unless major changes are made. Trump and other U.S. politicians are also unhappy with the way Canada uses tariffs and export limits to protect the domestic dairy market. The Canadian tariffs are not formally part of NAFTA and Canadian Foreign Minister Chrystia Freeland has made clear Ottawa will defend the system.

One of the most contentious issues is the investor-state dispute settlement obligations contained in Chapter 11 of NAFTA. Chapter 11 allows corporations or individuals to sue Mexico, Canada or the United States for compensation when actions were taken by those governments (or by those for whom they are responsible at international law, such as provincial, state, or municipal governments) violate international law. And, under the Chapter 11, Canada is the most frequently sued country under NAFTA. According to the Canadian Labour Congress (CL) (Congrès du travail du Canada), Chapter 11 is eroding democracy, undermining environmental regulations, and discouraging public interest policymaking. Hence, CLC is calling for abolishing this particular chapter.

In the past, U.S. has repeatedly challenged Canada through World Trade Organization and NAFTA tribunals over softwood lumber industry trade, and both tribunals have ruled in favor of Canada. Most of these disputes have been litigated before Chapter 19 panels (another contentious chapter within NAFTA framework). Current rules for bilateral trade in softwood lumber between our two nations are fair, despite protestations from the U.S. lumber industry. The Canada-U.S. Softwood Lumber Agreement (SLA)expired in 2015, and there is concern that the U.S. Government will pursue industry-led changes that would be detrimental to the Canadian industry. The Canadian government must ensure that forestry workers in Canada are protected and that any new agreement struck (whether inside or outside of the NAFTA) upholds the rules that maintain a level playing field across borders.

Expected Outcomes:

The U.S. has a daunting task ahead along with Mexico and Canada getting this deal right. Either way, U.S. credibility is already being questioned. It's a plain fact, NAFTA talks are inseparable from politics. Mexico has presidential elections scheduled to be held on July 1, 2018, which eventually reduces the chances for Mexican leaders (including the negotiators) to concede anything to Washington. On top of that, the upcoming U.S. congressional midterm elections (scheduled to be held in the fall of 2018) will create another hurdle for NAFTA. The on-going engagement between the respective partners are into a critical phase and it's utterly important for all the three countries to reach a mutually acceptable conclusion for the better good.